Yields on Indian government securities, especially the 10-year benchmark bond, remained rangebound even after global bond yields fell sharply following the imposition of tariffs by US President Donald Trump.
Mahendra Kumar Jajoo, CIO - Fixed Income at Mirae Assets Mutual Fund, said this is because Indian bond yields have already seen a decline in the past few weeks in anticipation of rate cuts and OMO purchases of government securities announced by the Reserve Bank of India (RBI). Hence, a further drop in yields after the tariffs was limited.
Since the tariff imposition, US bond yields have fallen by around 23 basis points (bps), Japan’s by 36 bps, China’s by 15 bps, the Eurozone’s by 29 bps, the UK’s by 24 bps, Canada’s by 4 bps, and France’s by 10 bps.
In contrast, Indian bonds remained almost steady at 6.479 percent on April 7, as compared to 6.481 percent on April 2, which was before the US tariff imposition.
Last week, Trump unveiled global reciprocal tariffs under which the US would charge a 34 percent tax on imports from China, a 20 percent tax on imports from the European Union, a 25 percent tax on South Korea, a 26 percent tax on India, a 24 percent tax on Japan, and a 32 percent tax on Taiwan.
The reasons for the drop in bond yields in India and other countries differ as well. For instance, the US yields are falling as investors may be moving towards safe haven and due to recession worries. In India, however, bond yields have eased due to moderating inflation, slowing growth, and a large liquidity injection by the central bank, Jajoo said.
RBI measures
Over the last few months, the RBI has been actively managing liquidity, which has fallen into deficit since mid-December, using various tools such as daily variable rate repo auctions, USD/INR Buy/Sell swap auctions, and OMO purchases. All these measures helped liquidity in the banking system turn positive in the last week of March.
The OMO purchase tool used by the RBI also helped Indian bond yields fall sharply because most banks with excess securities started selling them to the RBI in auctions to ease liquidity.
This has also helped banks boost their treasury income.
Also, amid the US tariffs, there are growing concerns that global and Indian growth will slow down, leading to a rate cut by the RBI. Anticipating this, traders and investors have taken positions accordingly, leading to a fall in yields.
A Moneycontrol poll of 21 economists, treasury heads and fund managers showed that the RBI is expected to cut the repo rate by 25 bps in the upcoming monetary policy on April 9.
Usually, when the interest rate differential between the US and India increases, foreign investors rush to India to lock in higher returns. However, money market experts said that in the current environment of heightened uncertainty, foreign investors may seek a safe haven and prefer to invest in their home countries.
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